Case Detail

HCIA 4/2019

[2021] HKCFI 1846

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

INLAND REVENUE APPEAL NO. 4 OF 2019

________________________

BETWEEN
	HEATH BRIAN ZARIN	Appellant
and
	THE COMMISSIONER OF INLAND REVENUE	Respondent

________________

Before: Hon Coleman J in Chambers (Open to Public)

Date of Submissions: 26 June, 10 and 17 July 2020

Date of Judgment: 29 June 2021

____________________

J U D G M E N T

____________________

A. Introduction

1. This is an appeal by the appellant (“Taxpayer”) from the decision D11/19 (“Decision”) of the Inland Revenue Board of Review (“Board”) dated 23 August 2019. The Decision dismissed the appellant’s appeal against a Determination by the respondent Commissioner of Inland Revenue (“CIR”) confirming certain additional assessments to salaries tax (“Assessments”), raised by the CIR under sections 8 and 9 of the Inland Revenue Ordinance Cap 112 (“IRO”).

2. The appeal was originally sought to be pursued in relation to various constituent elements of the Assessments, which have been defined earlier as “Sum A”, “Sum B1”, “Sum B2”, “Sum C” and “Sum D”. By my decision dated 19 December 2019 [2019] HKCFI 3101 (“Leave Decision”), I refused leave to appeal in respect of Sums A, B1, B2, and C, but granted leave to appeal in respect of Sum D.

3. I decided the substantive appeal in respect of Sum D on paper submissions, in a judgment dated 11 March 2020 [2020] HKCFI 330, now reported at [2020] 2 HKLRD 229 (“Sum D Decision”). I allowed the appeal.

4. Also on 11 March 2020, Yuen JA gave Judgment [2020] HKCA 147 on the Taxpayer’s renewed application for leave to appeal as regards Sums B2 and C only (no further challenge being made as regards Sums A and B1). Yuen JA granted leave to appeal on the ground underpinning Sums B2 and C – which was articulated to her in a slightly different way than it had been put to me – and the matter was remitted to me to deal with the substantive appeal.

5. Therefore, I am in the slightly odd position of having to determine the merits of an appeal on a ground which I previously thought was not reasonably arguable. For that reason, I have delayed in considering the appeal so as to allow a ‘fresh’ approach.

6. I gave directions for the appeal to be dealt with on paper submissions. As throughout, Mr Stefano Mariani, of Deacons, acted for the Taxpayer, and Mr Wilson Leung, of Counsel, instructed by the Department of Justice, acted for the CIR.

B. Background Facts

7. The full background facts can be found set out in the Leave Decision. For present purposes, it suffices to identify the following.

8. The Taxpayer was employed by a bank (“Company”), under a countersigned employment letter (“Employment Contract”). Under the Employment Contract, amongst other things, the Taxpayer was provided with participation in a “discretionary bonus scheme”, under which the Company may in its discretion award a bonus which might take the form of cash, or shares, or a combination of both. As is typical with shares awarded under such a scheme, the vesting of shares would take place over a number of years.

9. Relevantly, as part of his discretionary bonus for the performance year 2011, on 12 March 2012 the Taxpayer was granted a restricted share award of shares, defined in the Decision as the “2012 Shares”. Those shares were to vest as to 33%, 33% and 34% in March 2013, 2014 and 2015 respectively.

10. Amongst the terms of the share plan (“Plan”) were terms that: (a) participation in the Plan was governed by the rules of the Plan and did not form part of the Employment Contract; (b) the award would vest on the vesting date specified, provided the participant remained continuously employed within the Group or fell within the scope of the ‘good leaver’ provisions set out in the Plan; (c) awards might be amended, reduced or cancelled by a relevant remuneration committee at any time before the award vested, and the committee had the discretion to impose additional conditions on the awards; (d) if the participant left the Group before the vesting date(s) as a good leaver, then subject to the approval of the committee and the policy of the Company, the awards would vest in full on the vesting date(s) subject to the committee’s authority already mentioned; (e) good leaver reasons included, amongst other things, redundancy; and (f) where the rule of good leaver is applied and the participant had entered into a termination agreement in connection with the cessation of employment, the awards would not vest until the participant had complied with, or was released from his obligations under, that termination agreement.

11. By letter dated 21 January 2013, the Company terminated the Taxpayer’s employment on the grounds of redundancy. Amongst other things, the letter stated its terms would be in full and final settlement of the termination of employment, and that the Taxpayer would be treated as a good leaver, and the vesting of any un-vested shares would be conditional on his compliance with the terms in the letter, one term being that the Taxpayer would assist the Company and any group company in relation to certain litigation (“Litigation”) regarding the Company’s investment in a particular company, including attendance at court or arbitration hearings outside Hong Kong.

12. The Taxpayer did not accept those terms offered, and he made alternate suggestions. There then followed negotiations between solicitors appointed on behalf of the Company and the Taxpayer. Ultimately, by letter dated 20 June 2013 from the Company’s solicitors, signed by the Taxpayer on 21 June 2013, revised terms and conditions regarding the taxpayer’s termination of employment were agreed (“Termination Agreement”).

13. The terms of the Termination Agreement included:

(1) because the Taxpayer’s employment was terminated by reason of redundancy, he would be treated as a good leaver so that all remaining restricted shares previously awarded to the Taxpayer would vest on the same terms as stated in the letters awarding them to the Taxpayer;
(2) any release of the 2012 Shares would be conditional on the Taxpayer having not committed a breach of any of the terms of the Termination Agreement, including providing reasonable assistance, as set out in the Termination Agreement, in respect of the Litigation;
(3) if the Taxpayer committed a breach of any of the terms of the Termination Agreement, any unvested 2012 Shares would be forfeited and the Taxpayer would repay the cash value of any shares vested in the period from termination of employment and the date of breach;
(4) the Taxpayer would be obliged to provide reasonable assistance in proceedings and any matter with which he was dealing during his employment in relation to which he had relevant knowledge, as well as specifically the Litigation;
(5) the Taxpayer agreed to withdraw an outstanding data access request and not to issue any similar one;
(6) except for a claim to enforce the Termination Agreement itself, the Taxpayer agreed to release and discharge the Company and related parties from all claims etc in connection with the employment or the cessation of the employment, including any claims for carried interest, bonus, restricted shares under the plan and any payments during employment or arising from cessation of employment.

14. The Company subsequently filed notifications by an employer in which it reported the Taxpayer as being in receipt of released restricted shares, as against the date of the award, date of release, number of shares released and market price, hence reportable value. The reported value included, amongst others:

(1) the sum of $1,764,805 (“Sum B2”) released on 12 March 2014 as part of the 2012 Shares; and
(2) the sum of $1,579,820 (“Sum C”) released on 12 March 2015 as part of the 2012 Shares.

15. The Assessor raised the additional Assessments to salaries tax on (amongst others) Sums B2 and C. The Taxpayer objected to the additional Assessments, but the Assessments were upheld in the Deputy Commissioner of Inland Revenue’s Determination dated 29 November 2017. The Taxpayer appealed to the Board against the Determination. The Board dismissed that appeal by its Decision.

C. The Decision

16. A fuller description of the Decision can be found in the Leave Decision. For present purposes, the following suffices.

17. The Board found the Taxpayer’s evidence to be credible, and considered his testimony as part of the body of evidence as a whole.

18. As to Sum B2 and Sum C, the Board noted that they were derived from the 2012 Shares, as part of a discretionary bonus which provided no guarantee of them or their value. Having referred to clause 1.1(b) of the Termination Agreement, the Board found Sum B2 and Sum C to represent the value of shares the Company released to the Taxpayer pursuant to the Termination Agreement, instead of being contractual entitlements under the Employment Contract.

19. Nevertheless, the Board noted that was not determinative as to whether their value was “income from employment”, and went on to consider the purpose for which the employer made the payment to the employee. To ascertain that purpose, the Board considered the background against which the Termination Agreement was entered into, engaging in what might be described as a “multi-factorial assessment”. The Board looked in particular at the background circumstances, the correspondence between solicitors for the Taxpayer and the Company, what it regarded as the peripheral importance of the data access request, and the general confidentiality provision and withdrawal of threat of litigation in the Termination Agreement as not constituting a fresh bargain. The Board held overall that the disagreement between the Taxpayer and the Company had not gone to the point that litigation was imminent or where the Company was eager to settle to avoid litigation.

20. On that basis, the Board distinguished the facts from those in the Poon case (see below), which involved the making of a payment as “consideration to make the Taxpayer go away quietly”. The Board held that the continuing release of the 2012 Shares to the Taxpayer was “in return for acting or being an employee” or as a “reward for past services” and was not “for something else”. Hence, the Board considered, Sum B2 and Sum C were “income from employment” chargeable to salaries tax.

D. Applicable Principles

21. There is no real dispute as to applicable principles, nor that they were properly set out in the Decision.

22. Section 8(1)(a) of the IRO materially provides as follows:

“(1) Salaries tax shall, subject to the provisions of this Ordinance, be charged for each year of assessment on every person in respect of his income arising in or derived from Hong Kong from the following sources – (a) any office or employment of profit;”

23. Section 9(1)(a) of the IRA materially provides as follows:

“(1) Income from any office or employment includes – (a) any wages, salary, leave pay, fee, commission, bonus, gratuity, perquisite, or allowance, whether derived from the employer or others [with certain exceptions not applicable in this case]”

24. In Fuchs v CIR (2011) 14 HKCFAR 74, the Court of Final Appeal summarised the correct approach, in particular at §§14-22. That was a case which, on its facts, involved a taxpayer who had an accrued right under his contract of employment to be paid certain sums upon termination. Applying the principles, there was little difficulty in holding that the payments received by him were sourced in his employment and so chargeable to salaries tax. But it was also specifically recognised, at §13, that it is often difficult to decide whether the facts of a particular case fall within the statutory language.

25. Indeed, it is not always easy to reconcile the various previous authorities, some of which were summarised by Chung J in Murad v Commissioner of Inland Revenue [2009] 6 HKC 478 at §§20-22. But that may be no surprise when particular cases may be “difficult, borderline and depending on narrow distinctions”: see Comptroller-General of Inland Revenue v Knight [1973] AC 428, at 433.

26. A broad summary of the principles relevant to the present appeal is as follows:

(1) Section 9(1)(a) makes clear that bonuses, including the vesting of restricted shares by virtue of an employment related security scheme, fall within “income” from employment for the purposes of the section 8(1) charging provision.
(2) But the question regarding the chargeability to tax of any particular bonus involves the construction of section 8(1)(a) of the IRO, namely whether that payment is income “from” any office or employment of profit.
(3) Not every payment which an employee receives from his employer is necessarily income “from his employment”. It is not sufficient to qualify a payment in that way simply because the employee would not have received the sum in question if he had not been an employee.
(4) Income chargeable under section 8(1) is not confined to income earned in the course of employment, but embraces payments made “in return for acting as or being an employee”, or “as a reward for past services or as an inducement to enter into employment and provide future services”.
(5) If a payment, viewed as a matter of substance and not merely of form and without being “blinded by some formulae which the parties may have used”, is found to be derived from the taxpayer’s employment in the sense mentioned above, it is assessable.
(6) The vital question is what is the “substance of the bargain” made between the employer and the taxpayer for the payments in question. Thus, even a gratuity would still be chargeable if payment is a reward from the employer (for example for past services), even though the employer was not obliged to pay it and thus the employee has no legal entitlement to it.
(7) A payment that is concluded as being “for something else” is not assessable, and does not come within the above test.
(8) Insofar as it is contended that a payment was not made in return for a taxpayer acting as or being an employee, but as consideration for “abrogating” his rights under the contract of employment, the operative test must always be the test identified above, reflecting the statutory language. The question is always: In the light of the terms on which the taxpayer was employed and the circumstances of the termination, is the sum in substance “income from employment”? Was it paid in return for his acting as or being an employee? Was it an entitlement earned as a result of past services or an entitlement accorded to him as an inducement to enter into the employment? If the answer is “Yes”, the sum is taxable, and it does not matter that it might linguistically be acceptable also to refer to it as “compensation for loss of office” or something similar. On the other hand, the amount is not taxable if on a proper analysis the answer is “No”.
(9) The “abrogation” examples may reach the conclusion that a payment is made in consideration of an employee agreeing to surrender or forego his pre-existing contractual rights, but “abrogation of contractual rights” is not itself the test of chargeability in every termination situation. The test is not whether the employer had acted in breach in terminating the contract. In every case, the test remains that of the purpose of the payment at the relevant time.
(10) Hence, in the context of payments made upon termination of employment, the same consideration applies: What was the substance of the bargain for the payments in question? What was the purpose of the payment? Was it a reward for services past, present or future (in which case it was from his employment or office), or was it “for some other reason” (in which case it was not)?
(11) If the employee was entitled to the payment under the contract of employment, then the purpose of the payment was in order for the employer to perform its obligations under the contract, and it follows that the payment was income “from” the employment. But if the employee was not so entitled, then one must go on to consider the purpose for which the employer made that payment.

27. In CIR v Poon Cho-ming John[2019] HKCFA 38, the CFA confirmed that the applicable principles are those set out in Fuchs, and that the Court of Appeal had correctly applied those principles on the particular facts of the Poon case.

28. As I put it in the Sum D Decision at §25, ultimately each case involves applying the statutory language to the facts. Despite the different phrases used by judges in other cases to describe where the source of payment satisfies the statutory language that it is “from” employment, those cases only provide guidance and it remains the statutory words which are to be applied.

29. It is necessary to look at the substance, not the form or formulae or labels which might have been adopted by the parties. Entitlement to a payment under a contract of employment would indicate the payment is from employment, but even the absence of such an entitlement then requires looking further at the purpose of the payment. At bottom, the question remains whether the income is “from” the taxpayer’s “employment”.

30. Another relevant principle potentially applicable in this context is that, before the Board, the Taxpayer bore the burden of proof throughout, and the CIR did not have the burden of proving anything. For that reason, an appeal before the Board may be disposed of simply on the basis of burden of proof where a taxpayer fails for having failed to discharge that burden.

E. The Appeal

31. When argued before me on the original leave application, the main point made was as regards what was said to be the manifest inconsistency between the finding of fact that Sums B2 and C represented the value of shares released pursuant to the Termination Agreement and the conclusion nevertheless that those sums were from the Taxpayer’s employment for the purposes of the charge to salaries tax. It was said that there is a logical fallacy in confusing correlation with causation.

32. As was recognised by Yuen JA, since then the point has been slightly differently articulated. My summary of Mr Mariani’s argument on this appeal is as follows:

(1) The 2012 Shares were granted to the Taxpayer while he was employed by the Company.
(2) But the 2012 Shares did not vest at the same time.
(3) Under the relevant rules of the share award plan, the grant of shares did not entitle the employee to a transfer of those shares, so that the grantee received nothing of value unless and until the shares vested in accordance with the rules.
(4) In other words, the mere grant of shares was not a “payment”, and any “payment” potentially chargeable to salaries tax took place only upon vesting.
(5) The rules emphasised the relevant employer’s apparently unfettered discretion to impose vesting conditions as it saw fit, which might relate to performance in employment, but which could in principle be unrelated to performance in employment.
(6) Further, the rules provided that the unvested shares of a “good leaver” would vest subject to any performance-related or other conditions imposed by the employer or the Group. In that regard, the Company or Group had an unfettered discretion to impose such other conditions, including non-performance related conditions, as they saw fit to progress the vesting of any tranche of shares unvested as at the date of the termination of the leaver’s employment.
(7) Rule 5.7 of the Plan rules stipulated that where the employee entered into a termination agreement in connection with the cessation of his employment, and subject to the discretion of the Group unilaterally to cancel a grant of shares or otherwise to impose such further conditions as it saw fit, the award in question would not vest until the outgoing employee had complied with the terms of that termination agreement.
(8) The rules of the Plan also made clear that the rules and operation of the Plan did not form part of the Contract of Employment, and that rights and obligations arising from the employment relationship were separate. Further, no employee had a right to compensation for any loss in relation to the Plan, including loss or reduction of rights or expectations in circumstances of the termination of employment.
(9) Therefore, the net effect of the rules was that the Group and the Company of any outgoing employee dismissed by reason of redundancy had an unfettered discretion as to whether that employee in fact received any part of any unvested tranche of shares.
(10) The Termination Agreement was a discrete contract between the Taxpayer and the Company.
(11) Under the Termination Agreement, the continued vesting of the 2012 Shares was expressly stated to be in consideration for the Taxpayer agreeing to the terms of the Termination Agreement.
(12) Further, in consideration for the Company’s agreement to matters in clause 1 of the Termination Agreement, the Taxpayer covenanted and gave undertakings as to various matters, including assisting in the Litigation, as well as withdrawing a data access request previously lodged and agreeing not to assert any rights to any carried interest.
(13) Those covenants and undertakings were fresh consideration provided by the Taxpayer in order to procure the Company to agree to matters including the vesting of the 2012 Shares.
(14) The Taxpayer had not been entitled, either contractually or beneficially, to Sum B2 and Sum C as at the date of the termination of his employment, and it was the due compliance with the terms of the Termination Agreement which led to the vesting of the 2012 Shares.
(15) Only when the 2012 Shares actually vested was anything received of value, and the things the Taxpayer did or agreed not to do to secure that vesting related to matters following the termination of his employment and during a period when he was not employed.
(16) Whilst the grant of the 2012 Shares was a function of the taxpayer’s performance as an employee, the proximate cause of the vesting of the 2012 Shares is a separate matter.
(17) The position is binary; either a sum is “from” employment, or it is not. If the relevant question is posed as to whether the vesting of the 2012 Shares was reward for the Taxpayer’s past, present, or future services in employment, or otherwise for acting as an employee of the Company, the answer must be ‘No’.
(18) This is because the vesting of the 2012 Shares was consideration for the contractual obligations agreed under the Termination Agreement, which was made six months after the Taxpayer’s employment had ended.

33. Mr Mariani also submitted that the Board misunderstood the case advanced by the Taxpayer before it. He had not suggested that Sum B2 and Sum C were paid to him so that he would “go quietly” in the sense that, as in the Poon case, the threatened actions of the Taxpayer would have incurred reputational and administrative prejudice to the Company or Group. The fundamental issue was simply for what reason the 2012 Shares were released. In that regard, the Board did find that the 2012 Shares were in reality released pursuant to the Termination Agreement, which it is common ground was not a contract of employment. Therefore, any suggestion that the Taxpayer could have secured the vesting of the 2012 Shares had he remained in employment and met conditions for vesting to which he was subject qua employee is simply a counterfactual suggestion, not entailing that Sum B2 or Sum C in fact arose from his employment.

34. Further, Mr Mariani submitted that the fact that the 2012 Shares were initially granted as a function of performance in employment goes only to quantum and is not causally relevant – which is the proper question under section 8(1). Looking at that question, Mr Mariani submitted that the bargain struck under the Termination agreement was in essence: “you, the Taxpayer, are no longer employed by us, the Company, but if you now do for us these things that you are not and were never before obliged to do, we shall in return transfer to you the shares to which you are not entitled, and which we are not otherwise obliged to transfer to you”.

35. In his submissions for the CIR, Mr Leung emphasised that the Taxpayer has a heavy burden to discharge on this appeal, where the Board has made an unequivocal finding that Sums B2 and C were “from” the Taxpayer’s “employment”, which is a question of fact or alternatively mixed fact and law. Hence, the Taxpayer must show that the Board’s conclusion was contrary to the true and only reasonable conclusion, but he cannot show that. My summary of Mr Leung’s argument is as follows:

(1) Sums B2 and C represented part of the value of the 2012 Shares.
(2) The 2012 Shares were granted to the Taxpayer in recognition of his job performance, and as an important component of his employment compensation package.
(3) Whilst it is correct that the Board found that the 2012 Shares were released to the Taxpayer (allowed to vest) pursuant to the Termination Agreement – as opposed to being contractual entitlements under the Employment Contract – the Board also correctly found that was not determinative of the relevant question.
(4) Numerous cases identify payments made pursuant to a termination (or similar) agreement which are nevertheless held to be “from” employment.
(5) Even a payment of a sum to which the employee has no contractual entitlement may still be taxable if it satisfies the statutory test.
(6) Hence, the Board’s task remained to consider the purpose for which the Company made the payments to the Taxpayer in the form of the vesting of the 2012 Shares, to answer the statutory question whether it was “from” the employment.
(7) The Board fully considered the factual matrix, and the submissions made to it on behalf of the Taxpayer that Sums B2 and C were only released to him due to additional obligations undertaken by him under the Termination Agreement.
(8) The Board found as facts that: (a) the disagreement between the Taxpayer and the Company had not reached the stage where litigation was imminent, so the 2012 Shares were not released for the purpose of settling potential litigation; (b) the taxpayer’s agreement to withdraw his data access request was a matter of tactical and peripheral importance; and (c) the confidentiality provision did not constitute a fresh bargain for which Sums B2 and C were paid.
(9) The Board was also alive to the distinction between the grant and vesting of shares, but held that the vesting was nevertheless “in return for acting or being an employee” or as a “reward for past services”.
(10) Arguments about the effect of the rules under the share award plan, intended to identify the Taxpayer having had no contractual entitlement to the vesting of the 2012 Shares, are a ‘red herring’.
(11) Anyway, as explained by the Taxpayer in his own witness statement, a good leaver would have at least an expectation (albeit no strict contractual entitlement) that the Company would allow shares to continue to vest, as that is the very point of good leaver status.
(12) The consideration provided for the Taxpayer’s assistance with the Litigation was the Sum D payment (as held in the Sum D Decision, consistent with the underlying documents), and it is not correct now to argue that Sums B2 and C were paid for that assistance.

36. As regards the question whether the ground of appeal is a question of fact or law, I agree with Mr Mariani that Yuen JA’s grant of leave to appeal must have been on the basis that the ground of appeal is on a point of law. Indeed, she footnoted that, in the Leave Decision, I did not hold that no question of law arose on this ground. I also agree that the proper construction of the statute, the Employment Contract and share award rules and the Termination Agreement are matters of law. So I agree that I might set aside any part of the Decision which I think is tainted by an error of law committed by the Board.

37. Of course, Mr Leung is correct in saying that a finding of fact may be challenged as an error of law in certain, limited, circumstances, being: (a) if the decision was based on a finding of fact or inference from the facts which was perverse or irrational; (b) if there was no evidence to support the decision; (c) if the decision was made by reference to irrelevant factors; or (d) if the decision was made without regard to relevant factors: see Kwong Mile Services Ltd v CIR (2004) 7 HKCFAR 275 at §§31-34.

38. However, in the event, I do not think it is necessary to be tied up by this discussion. The appeal turns on whether the Board made an error of law in deciding that the particular facts of this case triggered chargeability to tax on the proper interpretation of section 8(1).

39. In his further reply submissions, Mr Mariani emphasised that this is a case where the Taxpayer had no vested right upon the termination of his employment, and only acquired the right to be paid Sums B2 and C upon agreeing to enter into the Termination Agreement. By that time, the Employment Contract had gone altogether, the employment period having ended some six months earlier. Mr Mariani submitted that it is not sufficient that there is merely some broad nexus or connection between the Taxpayer’s employment and the payment of Sums B2 and C for those sums to be “from” employment for the purposes of section 8(1), and the Court should be astute not to apply some sort of ‘but for’ test along the lines that but for the fact that the Taxpayer had been employed by the Company he would never have received Sums B2 and C. What is required is to focus on the purpose of the payment, identifying the causal element. Only if the purpose of vesting the 2012 Shares was to reward the Taxpayer for past service in employment with the Company would Sums B2 and C be properly chargeable to salaries tax.

40. Here, submitted Mr Mariani, the vesting of the 2012 Shares was to procure the Taxpayer to enter into the Termination Agreement and to make the covenants and give the undertakings therein. Further, whilst Sum D was to compensate the Taxpayer for the time actually incurred in assisting with the Litigation (for example by his attendance in Singapore), he was persuaded to provide the assistance at all – and possibly for as long as five years – by the Company’s commitment, amongst other things, to progress the vesting of the 2012 Shares. Therefore, Sum D was only part of the consideration moving from the Company to procure the covenants and undertakings given by the Taxpayer under the Termination Agreement.

41. In light of the Leave Decision, but the grant of leave on the renewed application made to the Court of Appeal, I have of course considered what appeared to influence that grant of leave. In her Judgment granting leave to appeal, Yuen JA placed weight upon the following matters:

(1) The Board apparently failed to consider the Taxpayer’s submissions that his undertaking to assist in the Litigation was “good consideration” for a “fresh bargain” between himself and the Company. But the Company’s requirement that the Taxpayer provide positive, specific active assistance for up to 5 years featured prominently in the Termination Agreement.
(2) So it can reasonably be argued that the Taxpayer’s undertaking to perform future acts of assistance to the Company in the Litigation, pursuant to the Termination Agreement, was extraneous to previous service as an employee, and in a different capacity, and that the obligation to perform those acts was the quid pro quo for the release of the Sum B2 and Sum C shares in the Termination Agreement.
(3) The Company’s stand appeared to be that the shares would not be vested if the Taxpayer refused to perform the future acts of assistance, and the Termination Agreement specified that any release of the 2012 Shares would be conditional on his having not committed a breach of any of the terms of it. Any breach would lead to the forfeit of any unvested 2012 Shares.
(4) So it can reasonably be argued that whilst the number of shares awarded may have been considered with reference to his performance in the past, the vesting of the shares was in substance the result of the bargain contained in the Termination Agreement, in which the undertaking to assist in the Litigation featured prominently.

42. Though the grant of leave was simply by reference to the reasonable arguability on those points, those points have been argued in the appeal (amongst others) as sufficiently strong to warrant allowing the appeal.

43. I bear in mind that the Board itself said the mere fact that the release of the 2012 Shares was made pursuant to the Termination Agreement is not determinative as to whether their value paid to the Taxpayer was income from employment. It remained necessary to consider the purpose for which the Company made that payment, there being many cases (and Fuchs was one of them) where sums paid pursuant to a termination or similar agreement have nevertheless been held to be “from” employment. I also note that the Board examined the facts to ascertain the purpose of the payment, of course including the terms of the Termination Agreement itself and the factual matrix against which it was made.

44. The Board made a finding of fact that the 2012 Shares were not released for the purpose of settling potential litigation, because it did not accept that there was in fact sufficient prospect of litigation. On the other hand, that finding does not simply lead to the conclusion that the purpose of continuing release of the 2012 Shares was “in return for acting or being an employee” or as a “reward for past services” – if there might be another purpose.

45. In the Leave Decision I noted that the supposed conditionality for release of the 2012 Shares, against compliance with the terms of the Termination Agreement, was something in any event foreshadowed by the terms of the relevant Plan. I have also touched on those terms when dealing with background matters above. Those terms provided that the award would vest on the vesting date specified, provided the participant remained continuously employed within the Group or fell within the scope of the good leaver provisions set out in the Plans. But the Plan also specified that where the rule of good leaver is applied and the participant had entered into a termination agreement in connection with the cessation of employment, the awards would not vest until the participant had complied with, or was released from his obligations under, that termination agreement. The Plan specifically envisaged that if, as became the fact, the Taxpayer left as a good leaver his awards would vest so long as, albeit not until, he complied with any termination agreement entered into.

46. Upon further reflection, and in light of the arguments on the appeal, those provisions seem to me to be important, but not for the reasons I previously had in mind. At the time that any employee became a participant in and subject to the Plan, it obviously would not be known under what circumstances the employee might cease employment. Nor would it be known, even if the participant were to be a good leaver, whether the participant might enter into a termination agreement with regard to the cessation of employment, and if so what those terms might encompass. Yet the Plan identified that the awards would not vest unless and until the participant had complied with, or been released from, whatever obligations might be contained in any particular termination agreement. So the Plan envisaged that a participant/employee might have to provide perhaps fresh consideration to become entitled to vesting, and such fresh consideration might have nothing to do with the employment.

47. I think this is very much a borderline case. Ultimately, I am persuaded that the terms of this particular Termination Agreement identify that the purpose for releasing the 2012 Shares was, amongst other things, to procure the Taxpayer to provide potentially long-term assistance in the Litigation (where another, but separate, part of the consideration – Sum D – was to compensate the Taxpayer for time actually spent and expenses incurred when providing that assistance). On that basis, Sum B2 and Sum C was not “from” the Taxpayer’s “employment”. It was “from something else”.

F. Conclusion

48. Therefore, I allow the appeal.

49. Though I have not heard argument on costs, it seems to me that the appropriate course is to make an order nisi that the costs shall follow the event of the appeal, namely that the Taxpayer’s costs of the appeal (encompassing any such costs as were ordered to be in the cause of the appeal) shall be payable by the CIR, to be taxed if not agreed.

50. The costs order nisi will become absolute if no variation application is made within 14 days. Any variation application will be dealt with on paper submissions.

(Russell Coleman)
Judge of the Court of First Instance
High Court

Mr Stefano Mariani, instructed by Deacons, for the appellant

Mr Wilson Leung, instructed by Department of Justice, for the respondent

HCIA 4/2019

[2020] HKCFI 330

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

INLAND REVENUE APPEAL NO. 4 OF 2019

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BETWEEN
	HEATH BRIAN ZARIN	Appellant
and
	THE COMMISSIONER OF INLAND REVENUE	Respondent

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Before: Hon Coleman J in Chambers (Open to Public)

Date of Submissions: 10, 17 & 24 January 2020

Date of Judgment: 11 March 2020

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J U D G M E N T

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Introduction

1. By my Judgment dated 19 December 2019 [2019] HKCFI 3101 (“Leave Judgment”), the appellant (“Taxpayer”) was granted leave to appeal from the decision D11/19 (“Decision”) of the Inland Revenue Board of Review (“Board”) dated 23 August 2019.

2. A full factual background is set out in the Leave Judgment, and reference can be made to that. For the purposes of this appeal, the following matters can be rehearsed.

3. The Taxpayer was employed by HSBC Markets (Asia) Ltd (“Company”) as Managing Director, Head of Direct Principal Investments Asia, by a letter dated 27 May 2010 and countersigned on 31 May 2010 (“Employment Contract”). By letter dated 21 January 2013, the Company terminated the Taxpayer’s employment on the grounds of redundancy. Amongst other things, the letter stated that the Taxpayer would assist the Company and any group company in relation to certain litigation (“Litigation”) regarding the Company’s investment in a particular company, including attendance at court or arbitration hearings outside Hong Kong.

4. The Taxpayer did not accept those terms offered and made alternate suggestions. There then followed negotiations between solicitors appointed on behalf of the Company and the Taxpayer. Ultimately, by letter dated 20 June 2013 from the Company’s solicitors, signed by the Taxpayer on 21 June 2013, revised terms and conditions regarding the taxpayer’s termination of employment were agreed (“Termination Agreement”). The terms of the Termination Agreement included that subject to the Taxpayer providing reasonable assistance, as set out in the Termination Agreement, in respect of the Litigation, he would be compensated for the time he spent, calculated at the rate of $12,692 per day, including four days of time spent between 22 January and 20 June 2013, as well as certain other expenses and reimbursements.

5. The specific terms were in clauses 1.2 and 2.1 of the Termination Agreement. Clause 1.2 provided that:

“Subject to [the Taxpayer] providing reasonable assistance as set out in paragraph 2 below in respect of the [Litigation], the Company agrees to:
(a) compensate [the Taxpayer] for the time he spends in relation to the [Litigation] from 21 January 2013 onwards, including time spent addressing any enquiries raised by or request from the Company’s legal advisers (such as time spent (i) meeting with the Company and/or the Company’s legal advisers; (ii) drafting, reviewing and finalising witness statement; and/or (iii) commenting on any other documents) as well as time spent on travel in relation to the [Litigation], in each case as reasonably requested by the Company and/or the Company’s legal advisers. Such compensation will be calculated at the rate of HK$12,692 per day. For the purposes of this clause, the Parties agree that for the period between 22 January 2013 and the date of this agreement, [the Taxpayer] will be compensated for 4 days of his time spent on this matter, which has as requested by your client, been checked with the legal advisers ... acting on such litigation. Likewise, the Company also reserves the right to have any further time claimed by [the Taxpayer] to have been spent on the [Litigation] to be checked by the legal advisers;
(b) pay reasonable and pre-approved travel and accommodation expenses [the Taxpayer] incurs in providing the assistance in relation to the [Litigation] pursuant to HSBC Group travel policy as at 21 January 2013 (as if [the Taxpayer] was still as an employee based in Hong Kong of the title held by him as at that date, save that if [the Taxpayer] relocates outside Hong Kong, any travel shall be from his primary city of residence rather than from Hong Kong;
(c) provide your client with reasonable security support, which will be managed through the Company’s in-house security team in the relevant location of the litigation ...; and
(d) reimburse reasonable and pre-approved legal expenses for advice obtained by [the Taxpayer] directly connected to defending any retaliatory proceedings commenced against [the Taxpayer] brought by the defendant(s) in the [Litigation], subject to his co-operation with the Company’s reasonable requests in the selection of appropriate legal counsel and for prompt access to advice obtained.”

6. Clause 2.1 was headed “Obligations after termination of employment”, which by the introduction were owed “in consideration of the Company agreeing to the matters above”. Clause 2.1(a) provided that the Taxpayer:

“... will provide the company and the Group with such reasonable assistance in relation to any claim or threatened claim, investigation, administrative or regulatory proceeding as the Company or the Group may reasonably require in relation to any matter with which [the Taxpayer] was dealing during his employment and/or any matter which arises after the termination of [the Taxpayer’s] employment with the Company but in relation to which [the Taxpayer] has relevant knowledge.”

7. Clauses 2.1(b)-(f) dealt in further detail with the obligations amounting to reasonable assistance, including giving evidence to various regulatory authorities and in attendance at court or arbitration hearings in relevant jurisdictions until the conclusion of all evidence required or five years from the date of the agreement, whichever is earlier; the provision of security and the ability for the Taxpayer to decide not to travel to a country if there is a credible threat to safety; the removal by the Company of legal funding if a conflict or a significant risk of conflict subsequently arises between the Company’s interests and those of the Taxpayer; reimbursement to the Company of legal fees, disbursements and other expenses if recovered by the Taxpayer; and that the Taxpayer would not, without the Company’s prior consent, enter into any compromise or settlement of any relevant litigation.

8. The Litigation was a dispute that arose from certain Indian investments of the Company, in the management of which the Taxpayer had been involved whilst he was employed, and with respect to which he had first-hand knowledge. The Taxpayer rendered relevant services, for which his presence was required between 29 July 2013 and 2 August 2013. As noted in clause 1.2, the Taxpayer had already rendered assistance for 4 days in the period from the termination of his employment up to the making of the Termination Agreement.

9. The Company later paid the Taxpayer, in Singapore, the total of $50,768 (“Sum D”) as the agreed compensation in relation to the Litigation. Arithmetically, this amounted to 4 days’ work at the agreed daily rate. Amongst other additional assessments to salaries tax, the Assessor raised additional assessment to salaries tax on Sum D.

10. The Taxpayer objected to the additional assessments, but the assessment was upheld in the Determination dated 29 November 2017 made by the Deputy Commissioner of Inland Revenue. The Taxpayer appealed against the Determination to the Board. The Board dismissed that appeal by its Decision.

11. Leave to appeal from the Decision had actually been sought on three grounds of proposed appeal, but I granted leave to appeal only on the third proposed ground, in relation only to Sum D.

12. The ground of appeal or question identified was whether the Board erred in law in finding that sum was derived from the Taxpayer’s prior employment with the Company or was otherwise a reward for services rendered in employment, notwithstanding that the Taxpayer was, at the time he rendered the services for which Sum D was consideration, not employed by the Company and there was nothing in his Employment Contract requiring him to render such services. The main point made was that where there was no employment at the time of the provision of services for which Sum D was paid, and no prior agreement in the Employment Contract that the Taxpayer should render those services, the only contractual arrangement governing the provision of services was in the Termination Agreement.

13. I gave directions that the appeal be dealt with on paper submissions, which were respectively filed on 10, 17 and 24 January 2020.

14. The representation on the substantive appeal was the same as that before the Board and on the application for leave. Mr Stefano Mariani, of Deacons, appeared for the Taxpayer, and Mr Wilson Leung, of Counsel, instructed by the Department of Justice, appeared for the CIR.

The Decision

15. A full description of the Decision can be found in the Leave Judgment. For the purposes of this appeal, the following matters can be rehearsed.

16. In the Decision, the Board recited the agreed facts and the documents, and a rehearsal of the evidence given by the Taxpayer at the hearing. The Board found the Taxpayer’s evidence to be credible, and considered his testimony as part of the body of evidence as a whole. The Board also rehearsed the submissions made on behalf of the Taxpayer by Mr Mariani, and on behalf of the CIR by Mr Leung.

17. As to Sum D, the Board considered but rejected on the evidence the Taxpayer’s contention that he was acting as an “expert witness” or an “independent consultant”. Instead, the Board held that both the Taxpayer and the Company had an “understanding” that he was assisting in the capacity of a former employee. Some reliance was placed on the basis of calculation of the daily rate by reference to a specific proportion (1/260) of the Taxpayer’s final fixed pay. Pointing out, on the basis of the authority of Hochstrasser (Inspector of Taxes) v Mayes [1960] AC 376 (HL) at 388, that a payment would be taxable insofar as it is “made in reference to the services the employee renders by virtue of his office, and it must be something in the nature of a reward for services past, present or future”, the Board found Sum D to be “income from employment” chargeable to salaries tax.

Applicable Principles

18. Section 8(1)(a) of the IRO materially provides as follows:

“(1) Salaries tax shall, subject to the provisions of this Ordinance, be charged for each year of assessment on every person in respect of his income arising in or derived from Hong Kong from the following sources – (a) any office or employment of profit”

19. Section 9(1)(a) of the IRA materially provides as follows:

“(1) Income from any office or employment includes – (a) any wages, salary, leave pay, fee, commission, bonus, gratuity, perquisite, or allowance, whether derived from the employer or others [with certain exceptions not applicable in this case]”

20. It is common ground between Mr Mariani and Mr Leung that the Board correctly identified the legal principles to be applied. In its discussion of the relevant law, the Board referred to the main material statutory provision in section 8(1)(a) of the IRO, relating to the chargeability to salaries tax of a sum paid to a taxpayer on or after the termination of employment, and to the judgment of the Court of Final Appeal in Fuchs v CIR (2011) 14 HKCFAR 74, in particular the summary of principles by Ribeiro PJ at §§14-22.

21. The applicable principles can be broadly summarized, as they were by the Board, as follows:

(a)  The question involves the construction of section 8(1)(a) of the IRO, namely whether payment is income “from” any office or employment of profit.
(b)  Not every payment which an employee receives from his employer is necessarily income “from his employment”. It is not sufficient to qualify a payment in that way simply because the employee would not have received the sum in question if he had not been an employee.
(c)  Income chargeable under section 8(1) is not confined to income earned in the course of employment, but embraces payments made “in return for acting as or being an employee”, or “as a reward for past services or as an inducement to enter into employment and provide future services”. If a payment, viewed as a matter of substance and not merely of form and without being “blinded by some formulae which the parties may have used”, is found to be derived from the taxpayer’s employment in the sense mentioned above, it is assessable. The vital question is what is the “substance of the bargain” made between the employer and the taxpayer for the payments in question. Thus, even a gratuity would still be chargeable if payment is a reward from the employer (for example for past services), even though the employer was not obliged to pay it and thus the employee has no legal entitlement to it.
(d)  A payment that is concluded as being “for something else” is not assessable, and does not come within the above test.
(e)  Insofar as it is contended that a payment was not made in return for a taxpayer acting as or being an employee, but as consideration for “abrogating” his rights under the contract of employment, the operative test must always be the test identified above, reflecting the statutory language. The question is always: In the light of the terms on which the taxpayer was employed and the circumstances of the termination, is the sum in substance “income from employment”? Was it paid in return for his acting as or being an employee? Was it an entitlement earned as a result of past services or an entitlement accorded to him as an inducement to enter into the employment? If the answer is “Yes”, the sum is taxable, and it does not matter that it might linguistically be acceptable also to refer to it as “compensation for loss of office” or something similar. On the other hand, the amount is not taxable if on a proper analysis the answer is “No”.
(f)  The “abrogation” examples may reach the conclusion that a payment is made in consideration of an employee agreeing to surrender or forego his pre-existing contractual rights, but “abrogation of contractual rights” is not itself the test of chargeability in every termination situation. The test is not whether the employer had acted in breach in terminating the contract. In every case, the test remains that of the purpose of the payment at the relevant time.
(g)  Hence, in the context of payments made upon termination of employment, the same consideration applies. What was the substance of the bargain for the payments in question? What was the purpose of the payment? Was it a reward for services past, present or future (in which case it was from his employment or office), or was it “for some other reason” (in which case it was not)? If the employee was entitled to the payment under the contract of employment, then the purpose of the payment was in order for the employer to perform its obligations under the contract, and it follows that the payment was income “from” the employment. But if the employee was not so entitled, then one must go on to consider the purpose for which the employer made that payment.

22. Reference was also made to the decision of the Court of Appeal in Poon Cho-ming John v CIR [2018] 5 HKC 233. Since the Decision, that case has been heard on final appeal – see CIR v Poon Cho-ming John[2019] HKCFA 38 – and the CFA has confirmed that the applicable principles are those set out in Fuchs, and that the Court of Appeal had correctly applied those principles on the particular facts of the Poon case.

23. Mr Mariani also relied on the passage in Hochstrasser (Inspector of Taxes) v Mayes [1960] AC 376 (HL) at 391-392, where Lord Radcliffe stated:

“The test to be applied is ... contained in the statutory requirement that the payment, if it is to be the subject of assessment, must arise “from” the office or employment. ... I think that their meaning is adequately conveyed by saying that, while it is not sufficient to render a payment assessable that an employee would not have received it unless he had been an employee, it is assessable if it has been paid to him in return for acting as or being an employee.”

24. Further, reliance was placed on the passage in Shilton v Wilmshurst [1991] 1 AC 684 at 689, where Lord Templeman stated:

“[the charge to salaries tax] must therefore apply first to an emolument which is paid as a reward for past services and as an inducement to continue to perform services and, secondly, to an emolument which is paid as an inducement to enter into a contract of employment and to perform services in the future. The result is that in an emolument “from employment” means an emolument “from being or becoming an employee”. ... If an emolument is not paid as a reward for past services or as an inducement to enter into employment and provide future services but is paid for some other reason, then the emolument is not received “from employment”.”

25. Each case ultimately involves applying the statutory language to the facts. There may be different phrases which have been used by judges in different cases to describe where the source of payment satisfies the statutory language that it is “from” employment, and they may provide some useful guidance, but ultimately it is the statutory words which apply. It is necessary to look at the substance, not the form nor the formulae or labels which might have been adopted by the parties. Entitlement to a payment under a contract of employment would indicate the payment is from employment, but even the absence of such an entitlement then requires looking further at the purpose of the payment. At bottom, the question remains whether the income is “from” the taxpayer’s “employment”.

26. Chargeability under section 8(1)(a) is not confined to sums earned or received during the period of the taxpayer’s formal employment: see Fuchs at §17 and Shilton at 698 (quoted above). Hence, the fact that a service was rendered after the formal end of the taxpayer’s employment does not necessarily preclude a finding that the payment for that service was received “from” his employment.

27. I accept Mr Leung’s submission that this makes commercial sense. As he put it, the state of “employment” is not an all-or-nothing proposition. Mr Mariani described that as a “startling submission”, because the existence of an employment relationship is a binary proposition; either there is a contractual relationship of master and servant, or there is not. As he said, there is no such thing as “semi-employment”. But I think the point made by Mr Leung is a slightly different one; he recognises that the strict employment might have ceased, but identifies circumstances in which a (now former) employee might derive income which can be said to be “from” his employment. There are frequently obligations which arise post-termination with which the employer and/or the employee must comply (though such obligations are rarely separately compensated). Further, it is not uncommon for an ex-employee to be requested to return to perform some follow-up work (and that work might be separately compensated). But again, it seems to me that each case must be considered on its particular facts, focusing on the ultimate statutory question.

28. It is also important that, in an appeal before the Board, the taxpayer bears the burden of proof throughout, and the CIR does not have to prove anything. It is possible for an appeal to be disposed of simply on the basis of burden of proof, if the taxpayer fails to discharge his burden.

29. Hence, if a taxpayer wishes to argue (as the Taxpayer did before the Board) that a sum is not chargeable to tax under section 8(1)(a) of the IRO, he bears the burden of explaining and proving to the Board that the sum does not fall within the relevant formula as arising “from” employment, and that it was instead paid for “something else”. As a result, in this particular case, the Taxpayer bore the burden of proving to the Board that the Sum D assessed as chargeable to tax was not “from” his employment.

30. As to challenges made to findings of fact, said to amount to an error of law, guidance can be found in, for example, Kwong Mile Services Ltd v CIR (2004) 7 HKCFAR 275 at §§31-34, and §37. Such challenges can only be made if (a) the decision was based on a finding of fact or inference from the facts which was perverse or irrational; (b) there was no evidence to support the decision; (c) the decision was made by reference to irrelevant factors; or (d) the decision was made without regard to relevant factors. The appellant court should not disturb the Board’s conclusion unless it regards that conclusion as contrary to the true and only reasonable one.

31. This reflects that appellate courts are reluctant to interfere with findings at first instance, because Judges and tribunals can reasonably differ as to on what side of the line any particular case falls, particularly where there is the assessment of numerous facts.

The Appeal – Sum D

32. Some of the arguments relating to Sum D were of course canvassed on the application for leave to appeal, and are considered by me in the Leave Judgment. Nevertheless, in their written submissions for the appeal, both Mr Mariani and Mr Leung have traversed the ground on a wider basis, even if some good part of it re-treads that traversed on the application for leave.

33. Mr Mariani relied on the following facts to underpin his argument that Sum D was not income from employment within the meaning of section 8(1)(a) of the IRO:

(a)  The Taxpayer was not employed by the Company at the time he rendered the services in consideration of which the Company paid him Sum D, and neither the CIR nor the Board suggested that he was employed (or re-employed) at that time.
(b)  The Taxpayer was not obliged under the Employment Contract to render any such services following the termination of his employment.
(c)  The Taxpayer’s contractual obligation to assist the Company with respect to the Litigation arose from clause 1.2 of the Termination Agreement.
(d)  Sum D was computed on the per diem basis by reference to the Taxpayer’s final salary as an employee of the Company.

34. In his submissions on the application for leave to appeal, Mr Mariani described the Board’s reasoning as “with respect, incoherent”. In his submissions on appeal, Mr Mariani described the Board’s analysis as “logically untenable”. Even if there was evidence (which Mr Mariani does not accept) to support a finding of the “understanding” between the Taxpayer and HSBC that the former would help the latter in the Litigation, Mr Mariani said there is no provision in the IRO to charge to salaries tax any sums paid by a former employer to a former employee with respect to services not contemplated in the former employee’s contract of employment and rendered after the relevant employment had ceased.

35. In this case, Mr Mariani submitted, Sum D could not have been a payment for past services because the obligation to pay it came into being months after the termination of the Employment Contract, and arose separately only by virtue of the Termination Agreement. This was an entirely fresh bargain relating to services that the Taxpayer was under no obligation to render to the Company under the Employment Contract, and absent the agreement to do so and to be paid for it under the Termination Agreement.

36. In those circumstances, Mr Mariani submitted, such sums simply could not be “from” employment, and the Board’s reliance on the Hochstrasser case was misplaced. The Board’s conclusion was a non sequitur legally speaking. Mr Mariani submitted that there is a strict causal test: either the purpose of the payment is to induce a person into employment, or reward that person’s services in employment, or it is not. If it is not, the sum in question was paid for “something else” and is on that footing not taxable under section 8(1). Here, the proximate or effective cause of the payment of Sum D was the Termination Agreement.

37. As regards the Board’s conclusion that the evidence did not show that the Taxpayer was acting as an ‘expert witness’ or ‘independent consultant’, and by implication must necessarily have been acting as an employee, Mr Mariani described that as an “irrelevant observation”. His submission amounted to saying that the Taxpayer did not have to show on the balance of probabilities that he was an ‘expert’ or ‘consultant’ in any strict sense of those terms (neither of which should be taken as terms of art, but merely convenient ways of describing a contractual relationship with respect to the Litigation falling short of employment); the Taxpayer was merely required to show that Sum D was from “something else”, other than from his employment. Mr Mariani warned against offending the axiom of revenue law that no tax may be charged by default; either income or gains correspond to the definition of taxable income or gains in a taxing schedule, or they do not.

38. In response, Mr Leung submitted that the fact that service was rendered after the formal end of the Taxpayer’s employment does not preclude the Board from finding that payment received was “from” his employment, as section 8(1) is not limited or confined to income earned in the course of employment. He submits that it would be incorrect single-mindedly to focus on whether the taxpayer had any contractual “obligation” to perform the task for which he was paid. Nor is there anything in the case law, such as Fuchs, which says that a payment can only be taxable if it is made in relation to a task stipulated under the employment contract. That, said Mr Leung, is not the statutory test.

39. Further, in recognition that Sum D was paid pursuant to the Termination Agreement, Mr Leung said that it is entirely possible for a sum to be paid pursuant to a termination or settlement agreement, and yet still be “from” the taxpayer’s employment. From the Leave Decision, it can be seen that I accept that submission of principle. The application of principle will, of course, depend on the particular facts of the case.

40. Mr Leung’s primary point – and by reference to the burden borne by the Taxpayer before the Board – was that it was the Taxpayer’s case before the Board that he was acting as an ‘expert witness’ or ‘independent consultant’ in providing assistance in the Litigation, but the Board rejected that contention after examining all the facts. Once the Board had come to that decision, said Mr Leung, it followed that the Taxpayer had failed to discharge his burden of proof in relation to Sum D.

41. But I agree with Mr Mariani that, notwithstanding where the burden lay before the Board, the question as to the source of income is not a matter which ought to be decided by default. Indeed, if one focuses merely on whether the Taxpayer can be regarded as an ‘expert witness’ or ‘independent consultant’ in his assistance in the Litigation, it is easy to lose sight of the real question. The only burden which the Taxpayer faced was to identify that Sum D was not “from” his prior employment so that it was “from something else”. Though in making the relevant assessment it can be helpful to posit and consider from what “something else” the income might have derived, I do not think it was necessary to have identified or to have proved in precise terms the “something else” so as to have satisfied the burden that it was not “from” employment.

42. In this context, Mr Leung acknowledged as a matter of fairness that there was some evidence which weighed in favour of the Taxpayer’s case. He noted that the Board quoted from clause 2.1 of the Termination Agreement, and acknowledged that that clause could be argued in support of the Taxpayer’s case as constituting a separate contract for services, discrete and wholly self-contained on the terms of the Termination Agreement, for him to give evidence before an arbitral tribunal after the fashion of an expert witness. (I have already quoted above Clause 2.1(a) of the Termination Agreement.)

43. But Mr Leung also pointed to what he said is the abundance of evidence going the other way, namely that the Taxpayer was assisting in the Litigation qua ex-employee of the Company, and not under an entirely fresh bargain relating to services. Mr Leung relies on the evidence in even the Taxpayer’s first letter to the Company dated 28 January 2013, in which he acknowledged being willing to provide reasonable assistance in relation to legal proceedings (including the Litigation) and acknowledged that it was “customary” for an (ex) employee to do so. This, said Mr Leung, evidences that the Taxpayer was assisting pursuant to what he regarded and acknowledged as “custom”, and not on the contingent basis of a further agreement being signed or a fee being paid.

44. But, to my mind, that the Taxpayer was assisting in the litigation qua ex-employee is not inconsistent with his doing so under an entirely fresh bargain. Of itself, I do not think it answers the underlying statutory question. One cannot overlook the reality that the Taxpayer was only capable of assisting the Company with the Litigation precisely because he was a former employee, who had been involved in the matters out of which the Litigation arose. Further, I think there is a danger of reading too much into the early correspondence, not least because the various negotiations continued for some time before the Termination Agreement was made. Once it is accepted (as I do accept) that Sum D was paid pursuant to the Termination Agreement, ordinary principles of contractual construction would point against reviewing what was intended by the terms of that agreement, using reference to earlier negotiations. As I noted in the Leave Judgment, whilst it is correct that the Taxpayer’s own letter dated 28 January 2013 acknowledged that after termination he was “willing to provide reasonable assistance” in relation to legal proceedings, that was in circumstances where he had no obligation to do so under the Employment Contract, and it is unlikely that someone of his seniority would do so without monetary compensation. Even a general willingness to assist might be favourably or unfavourably influenced by other factors, such as (in this case) whether satisfactory arrangements might be made as to bonus payments and vesting of shares. In any event, even the correct contractual construction would not of itself necessarily answer the underlying statutory question.

45. Nor do I accept Mr Leung’s submission that the Board’s finding, as a primary fact, that discussions between the Company and the Taxpayer never progressed to the stage where litigation was in prospect between them means that their relations did not deteriorate to such a state that the Taxpayer would have resiled from his acknowledged existing customary duties unless compelled to perform those duties by a new, fee earning contract. Quite simply, the Termination Agreement was indeed a new, fee-earning contract, at least as regards what became Sum D. It did not require there to have been any greater breakdown in relations than that the material employment relationship had already ceased, and the Termination Agreement was to agree the terms of cessation and consequential matters. But the material question remains whether the fee comprising Sum D paid under that contract was income “from” the Taxpayer’s “employment”.

46. There is more in Mr Leung’s point relating to the agreed per diem rate. He said this can suggest that the Taxpayer was providing assistance in a way comparable with the situation where an employee’s period of employment is agreed to end on a certain date, but at the last minute the employee is asked to stay on for a few more days for some reason. As Mr Leung said, in that situation, it would be natural for the employee to be paid pro rata on his old salary, and that (although not conclusive) it would be open to a board of review to rely on that fact to hold that the payment was “from” his “employment”, being referable to his former contract of service as opposed to a new contract for services. But, I think in such a situation it probably would be conclusive, because that situation likely describes a new or extended agreed end date for the employment, that is the continuation of employment rather than a new arrangement after the cessation of employment.

47. There is also more in Mr Leung’s point that the Termination Agreement, rather than mentioning acting as a ‘consultant’ or ‘expert’, simply stipulates the Taxpayer’s obligation to assist in litigation, limited to matters with which the Taxpayer was dealing during his employment. It was not some sort of ‘at large’, general or fresh appointment as a consultant or expert witness. Further, as Sum D is arithmetically payment for four days’ work at the agreed daily rate, it appears to have been paid in respect of services already rendered before the making of the Termination Agreement. This can be seen from clause 1.2(a), which I have quoted above. If so, then Mr Leung is correct that the Taxpayer had already, voluntarily, performed those duties even before he signed the Termination Agreement. That may give greater force to the idea that, though payment only became due under the Termination Agreement, the work already performed arose “from” the employment. On the other hand, as Mr Mariani pointed out, the payment of any sum under clause 1.2 was conditional on providing the reasonable assistance set out in clause 2, that is contingent on his performance of the Termination Agreement.

48. I have quoted clause 2.1, under which the Taxpayer was to provide reasonable assistance in relation to any claim or threatened claim, investigation, administrative or regulatory proceedings as the Company or the Group may reasonably require in relation to any matter with which the Taxpayer was dealing during his employment and/or any matter which arises after the termination of the Taxpayer’s employment with the Company but in relation to which the Taxpayer has relevant knowledge.

49. I think that clause identifies that the source of the payment of Sum D was the Termination Agreement. On that basis, Mr Mariani submitted that, whilst acknowledging the Taxpayer was useful because he had previously been employed, and the Company wished to maintain the benefit of knowledge obtained during employment, the money was actually not paid for providing services which can be said to have come themselves “from” the employment. The Taxpayer had no compulsion to assist in the way he agreed to, and he agreed to as part of – and only as part of – the Termination Agreement.

50. I agree. Further, that the agreement specifically identified that the Taxpayer would provide reasonable assistance even on matters arising after the termination of his employment, and that he might be required to do so for as long as 5 years after the date of the Termination Agreement, itself made nearly 6 months after the end of the employment, seems to me to take the terms of that agreement and the ensuing payment to be made away “from” the employment. The Termination Agreement also specifically envisaged the possibility of a conflict (or substantial risk of conflict) arising between the Company’s interests and those of the Taxpayer. That point also seems to me to point away from the services as being provided and paid for “from” the former employment.

51. I would be loathe to construe the terms of the Termination Agreement so that some sums as might be paid to the Taxpayer for his assistance in the Litigation, or in other litigation, might be thought to be “from” his employment, whilst other sums might not. It seems to me that the terms should be construed so as to cater for the various possibilities which might be envisaged. Sum D was potentially only a small part of a larger sum which might have been paid for perhaps significant assistance provided on many issues in many places over a number of years. I do not think the total of such a larger sum would reasonably regarded as arising “from” employment, and I do not think some small element of it should be carved out on a different basis.

52. I also have in mind that had the services been provided over more days, or over a longer period, on the facts they would almost certainly have been taxable as income in Singapore, or potentially as income chargeable to tax under section 14 of the IRO in Hong Kong. Those points also seem to me to support the conclusion that Sum D is not properly chargeable to tax under section 8(1)(a). I do not think the fact that the Taxpayer accepted that he had not paid any tax on Sum D in any jurisdiction somehow makes it chargeable to tax under section 8(1)(a), unless it is otherwise properly chargeable under that provision.

53. It seems to me that the facts on which the Board placed reliance, and the facts as a whole, identify on the test to be applied that Sum D was not income “from” employment. But, Mr Leung submitted that the question is not whether I would come to the same conclusion as the Board. Rather, he said, the question is whether there was sufficient evidence upon which the Board was entitled to reach its conclusion. On the various matters which he canvassed, and on which I have commented above, Mr Leung said that the Board was clearly entitled to have reached its conclusion, and that it is not one with which the Court should interfere.

54. Ultimately, said Mr Leung, the question whether a payment is “from” the taxpayer’s “employment” is a question of fact, or at least a question of mixed fact and law (a ‘multi-factorial’ assessment), so that the principles set out in paragraphs 30 and 31 above are applicable. Of course, Mr Mariani was also correct when he noted that I must have granted leave to appeal on the basis that the ground of appeal engaged a question of law.

55. Focusing on the statutory test, it is helpful to step back and look at the matter overall. As Fuchs states, the vital questions remain: what is the “substance of the bargain” made between the employer and the taxpayer for the payments in question, and what was the purpose of the payment? In my view, the answers to those questions and the statutory test identify that Sum D was not a sum of money received by the Taxpayer “from” his “employment”.

56. In the end, I think it is open to me to disturb the Board’s conclusion, because I regard the Board’s conclusion as contrary to the true and only reasonable conclusion to make.

Result

57. I allow the appeal on the ground of appeal relating to Sum D.

Costs

58. In recognition that I refused leave to appeal on the more financially substantial grounds and only granted leave to appeal on one of relative inconsequence financially, I ordered that the CIR is entitled to 75% of the CIR’s costs of the leave application in any event, to be taxed if not agreed. The other costs were to be costs in the appeal.

59. As I have now allowed the appeal, it seems to me that those costs and the costs of the appeal should follow the event and be payable to the Taxpayer by the CIR, to be taxed if not agreed.

60. In practical terms, there may need to be some accounting set-off in relation to these matters. It is also to be hoped that matters of costs could be agreed between the parties without the trouble and expense and time for any assessment.

	(Russell Coleman)
	Judge of the Court of First Instance
	High Court

Mr Stefano Mariani, instructed by Deacons, for the appellant

Mr Wilson Leung, instructed by Department of Justice, for the respondent

HCIA 4/2019

[2019] HKCFI 3101

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

INLAND REVENUE APPEAL NO. 4 OF 2019

________________________

BETWEEN
	HEATH BRIAN ZARIN	Appellant
and
	THE COMMISSIONER OF INLAND REVENUE	Respondent

________________

Before: Hon Coleman J in Chambers (Open to Public)

Date of Hearing: 19 December 2019

Date of Judgment: 24 December 2019

____________________

J U D G M E N T

____________________

Introduction

1. By summons dated 18 September 2019, the appellant (“Taxpayer”) seeks leave to appeal from the decision D11/19 (“Decision”) of the Inland Revenue Board of Review (“Board”) dated 23 August 2019. The Decision dismissed the appellant’s appeal against a Determination by the respondent Commissioner of Inland Revenue (“CIR”) confirming three additional assessments to salaries tax amounting to an aggregate of $1,752,968 (“Assessments”). The Assessments were raised by the CIR under sections 8 and 9 of the Inland Revenue Ordinance Cap 112 (“IRO”).

2. Section 8(1)(a) of the IRO materially provides as follows:

“(1) Salaries tax shall, subject to the provisions of this Ordinance, be charged for each year of assessment on every person in respect of his income arising in or derived from Hong Kong from the following sources – (a) any office or employment of profit;”

3. Section 9(1)(a) of the IRA materially provides as follows:

“(1) Income from any office or employment includes – (a) any wages, salary, leave pay, fee, commission, bonus, gratuity, perquisite, or allowance, whether derived from the employer or others [with certain exceptions not applicable in this case]”

4. The representation on the application for leave was the same as that before the Board. Mr Stefano Mariani, of Deacons, appeared for the Taxpayer, and Mr Wilson Leung, of Counsel, instructed by the Department of Justice, appeared for the CIR.

Principles on Leave to Appeal

5. The application for leave is made under section 69 of the IRO. Under that section, leave to appeal must not be granted unless the Court of First Instance is satisfied: (1) that a question of law is involved in the proposed appeal; and (2) that (a) the proposed appeal has a reasonable prospect of success, or (b) there is some other reason in the interest of justice why the proposed appeal should be heard.

6. In this application, no argument has been put forward as to the “some other reason” limb. Therefore, the focus of the argument has been on whether or not a question of law is involved in the proposed appeal, and whether the proposed question has a reasonable prospect of success. There is no dispute that “reasonable prospect of success” in the context of section 69 of the IRO means “reasonably arguable” and nothing more.

7. Further guidance as to applications under section 69 can be found, for example, in the decisions of Chow J in China Mobile Hong Kong Co Ltd v CIR [2018] 2 HKLRD 146 at §30, and of G Lam J in CIR v Right Margin Ltd [2017] 5 HKLRD 398 at §§12-13. That guidance includes that:

(a) The right to appeal is not unqualified and absolute. Any proposed question of law must be proper and satisfy a qualitative aspect.
(b) A question may superficially appear to be a question of law, but if it is general and vague and does not identify the issues to be argued, it is inadequate.
(c) It is not a proper question of law by turning the ultimate conclusion of the Board into a form of question.
(d) It is also not a proper question of law if the framed question fails to identify precisely the point of law involved or any specific legal error or question.
(e) Whether or not a proposed question is a proper question of law depends on the circumstances of the case.

8. As to challenges made to findings of fact, said to amount to an error of law, guidance can be found for example in Kwong Mile Services Ltd v CIR (2004) 7 HKCFAR 275 at §§31-34, and §37. Such challenges can only be made if (a) the decision was based on a finding of fact or inference from the facts which was perverse or irrational; (b) there was no evidence to support the decision; (c) the decision was made by reference to irrelevant factors; or (d) the decision was made without regard to relevant factors. The appellant court should not disturb the Board’s conclusion unless it regards that conclusion as contrary to the true and only reasonable one.

9. This reflects that appellate courts are reluctant to interfere with findings at first instance, because Judges and tribunals can reasonably differ as to on what side of the line any particular case falls, particularly where there is the assessment of numerous facts.

10. It may also be important to bear in mind that, in an appeal before the Board, the taxpayer bears the burden of proof throughout, and the CIR does not have to prove anything. As a result, in this particular case, the Taxpayer bore the burden of proving to the Board that the various sums assessed as chargeable to tax were not “from” his employment (see below).

Background

11. The Taxpayer was employed by HSBC Markets (Asia) Ltd (“Company”) as Managing Director, Head of Direct Principal Investments Asia, by a letter dated 27 May 2010 and countersigned on 31 May 2010 (“Employment Contract”). Under the Employment Contract, and in addition to a base salary, the Taxpayer was provided with a “guaranteed bonus”, participation in a “Carry Plan”, and participation in a “discretionary bonus scheme”.

12. As part of his guaranteed bonus for the performance year 2010, on 15 March 2011 the Taxpayer was granted a restricted share award of shares in HSBC Holdings plc under the HSBC Share Plan, which shares were defined in the Decision as the “2011 Shares”. The total shares granted were to vest as to 33%, 33% and 34% in March 2012, 2013 and 2014 respectively. As part of his discretionary bonus for the performance year 2011, on 12 March 2012 the Taxpayer was granted another restricted share award of shares in HSBC Holdings plc under the HSBC Share Plan 2011, which shares were defined in the Decision as the “2012 Shares”. Those shares were to vest as to 33%, 33% and 34% in March 2013, 2014 and 2015 respectively.

13. Amongst the terms of the two share plans (“Plans”) were terms that: (a) participation in the Plans was governed by the rules of the plans and did not form part of the Employment Contract; (b) the award would vest on the vesting date specified, provided the participant remained continuously employed within the Group or fell within the scope of the ‘good leaver’ provisions set out in the Plans; (c) awards might be amended, reduced or cancelled by a relevant remuneration committee at any time before the award vested, and the committee had the discretion to impose additional conditions on the awards; (d) if the participant left the Group before the vesting date(s) as a good leaver, then subject to the approval of the committee and the policy of the Company, the awards would vest in full on the vesting date(s) subject to the committee’s authority already mentioned; (e) good leaver reasons included, amongst other things, redundancy; and (f) where the rule of good leaver is applied and the participant had entered into a termination agreement in connection with the cessation of employment, the awards would not vest until the participant had complied with, or was released from his obligations under, that termination agreement.

14. By letter dated 21 January 2013, the Company terminated the Taxpayer’s employment on the grounds of redundancy. Amongst other things, the letter stated that the payment in lieu of three months’ notice would be made, together with an enhanced severance payment of $467,500; that the terms of the letter would be in full and final settlement of the termination of employment, and the Taxpayer would not bring any claims against the Company or other group companies; that the Taxpayer would be treated as a good leaver, and the vesting of any un-vested shares would be conditional on his compliance with the terms in the letter; and that the Taxpayer would assist the Company and any group company in relation to certain litigation (“Litigation”) regarding the Company’s investment in a particular company, including attendance at court or arbitration hearings outside Hong Kong.

15. The Taxpayer did not accept those terms offered and made alternate suggestions. There then followed negotiations between solicitors appointed on behalf of the Company and the Taxpayer. Ultimately, by letter dated 20 June 2013 from the Company’s solicitors, signed by the Taxpayer on 21 June 2013, revised terms and conditions regarding the taxpayer’s termination of employment were agreed (“Termination Agreement”). In passing, I would note that I have adopted the definition used by the Board in the Decision, but Mr Mariani suggests that a proper description of that agreement might better have been the “Settlement Agreement”. Of course, he also acknowledges that more turns on the content then on any particular label given to it.

16. The terms of the Termination Agreement included:

(a) because the Taxpayer’s employment was terminated by reason of redundancy, he would be treated as a good leaver for the purposes of the Plans, so that all remaining restricted shares previously awarded to the Taxpayer would vest on the same terms as stated in the letters awarding them to the Taxpayer;
(b) any release of the 2012 Shares would be conditional on the Taxpayer having not committed a breach of any of the terms of the Termination Agreement, including the one that he should not claim against the Company in connection with the employment or the cessation of the employment;
(c) if the Taxpayer committed a breach of any of the terms of the Termination Agreement, any unvested 2012 Shares would be forfeited and the Taxpayer would repay the cash value of any shares vested in the period from termination of employment and the date of breach;
(d) for the avoidance of doubt, the 2011 Shares would continue to vest on the release date(s) set out in the letter awarding them to the Taxpayer;
(e) subject to the Taxpayer providing reasonable assistance, as set out in the Termination Agreement, in respect of the Litigation, he would be compensated for the time he spent, calculated at the rate of $12,692 per day, including four days of time spent between 22 January and 20 June 2013, as well as certain other expenses and reimbursements;
(f) the Company would pay the Taxpayer a total enhanced severance payment of $467,500;
(g) the Taxpayer would be obliged to provide reasonable assistance in proceedings and any matter with which he was dealing during his employment in relation to which he had relevant knowledge, as well as specifically the Litigation;
(h) the Taxpayer agreed to withdraw an outstanding data access request and not to issue any similar one;
(i) except for a claim to enforce the Termination Agreement itself, the Taxpayer agreed to release and discharge the Company and related parties from all claims etc in connection with the employment or the cessation of the employment, including any claims for carried interest, bonus, restricted shares under the Plans and any payments during employment or arising from cessation of employment;
(j) there were confidentiality provisions, and a provision that neither party would make inaccurate or definitive statements about the other.

17. The Company subsequently filed notifications by an employer (including of an employee who is about to cease to be employed), in which it reported the Taxpayer as being in receipt of released restricted shares, as against the date of the award, date of release, number of shares released and market price, hence reportable value. The reported value included:

(a) the sum of $2,214,468 (“Sum A”) released on 28 June 2013 as part of the 2011 Shares;
(b) the sum of $2,155,895 (“Sum B1”) released on 17 March 2014 as part of the 2011 Shares;
(c) the sum of $1,764,805 (“Sum B2”) released on 12 March 2014 as part of the 2012 Shares; and
(d) the sum of $1,579,820 (“Sum C”) released on 12 March 2015 as part of the 2012 Shares.

18. The Company also notified the payment of the severance payment of $467,500 in compensation for the involuntary loss of employment with HSBC due to redundancy, which the Assessor of the Revenue accepted should not be assessed to salaries tax.

19. However, the Assessor raised additional assessments to salaries tax on Sums A, B1, B2 and C. The Assessor also raised additional assessment to salaries tax on the total of $50,768 (“Sum D”), being the total amount paid to the Taxpayer for four days’ compensation in relation to the Litigation.

20. The Taxpayer objected to the additional assessments, but the assessment was upheld in the Determination dated 29 November 2017 made by the Deputy Commissioner of Inland Revenue.

21. The Taxpayer appealed against the Determination to the Board. The Board dismissed that appeal by its Decision.

The Decision

22. In the Decision, the Board recited the agreed facts and the documents, and a rehearsal of the evidence given by the Taxpayer at the hearing. The Board found the Taxpayer’s evidence to be credible, and considered his testimony as part of the body of evidence as a whole. The Board also rehearsed the submissions made on behalf of the Taxpayer by Mr Mariani, and on behalf of the CIR by Mr Leung.

23. In its discussion of the relevant law, the Board referred to the main material statutory provision in section 8(1)(a) of the IRO, relating to the chargeability to salaries tax of a sum paid to a taxpayer on or after the termination of employment, and to the judgment of the Court of Final Appeal in Fuchs v CIR (2011) 14 HKCFAR 74, in particular the summary of principles by Ribeiro PJ at §§14-22.

24. The Board summarised the applicable principles broadly as follows:

(a) The question involves the construction of section 8(1)(a) of the IRO, namely whether payment is income “from” any office or employment of profit.
(b) Not every payment which an employee receives from his employer is necessarily income “from his employment”. It is not sufficient to qualify a payment in that way simply because the employee would not have received the sum in question if he had not been an employee.
(c) Income chargeable under section 8(1) is not confined to income earned in the course of employment, but embraces payments made “in return for acting as or being an employee”, or “as a reward for past services or as an inducement to enter into employment and provide future services”. If a payment, viewed as a matter of substance and not merely of form and without being “blinded by some formulae which the parties may have used”, is found to be derived from the taxpayer’s employment in the sense mentioned above, it is assessable. The vital question is what is the “substance of the bargain” made between the employer and the taxpayer for the payments in question. Thus, even a gratuity would still be chargeable if payment is a reward from the employer (for example for past services), even though the employer was not obliged to pay it and thus the employee has no legal entitlement to it.
(d) A payment that is concluded as being “for something else” is not assessable, and does not come within the above test. (The Board gave various examples of payments falling outside the test.)
(e) Insofar as it is contended that a payment was not made in return for a taxpayer acting as or being an employee, but as consideration for “abrogating” his rights under the contract of employment, the operative test must always be the test identified above, reflecting the statutory language. The question is always: In the light of the terms on which the taxpayer was employed and the circumstances of the termination, is the sum in substance “income from employment”? Was it paid in return for his acting as or being an employee? Was it an entitlement earned as a result of past services or an entitlement accorded to him as an inducement to enter into the employment? If the answer is “Yes”, the sum is taxable, and it does not matter that it might linguistically be acceptable also to refer to it as “compensation for loss of office” or something similar. On the other hand, the amount is not taxable if on a proper analysis the answer is “No”.
(f) The “abrogation” examples may reach the conclusion that a payment is made in consideration of an employee agreeing to surrender or forego his pre-existing contractual rights, but “abrogation of contractual rights” is not itself the test of chargeability in every termination situation. The test is not whether the employer had acted in breach in terminating the contract. In every case, the test remains that of the purpose of the payment at the relevant time.
(g) Hence, in the context of payments made upon termination of employment, the same consideration applies. What was the substance of the bargain for the payments in question? What was the purpose of the payment? Was it a reward for services past, present or future (in which case it was from his employment or office), or was it “for some other reason” (in which case it was not)? If the employee was entitled to the payment under the contract of employment, then the purpose of the payment was in order for the employer to perform its obligations under the contract, and it follows that the payment was income “from” the employment. But if the employee was not so entitled, then one must go on to consider the purpose for which the employer made that payment.

25. Reference was also made to the decision of the Court of Appeal in Poon Cho-ming John v CIR [2018] 5 HKC 233. (As an aside, since the Decision, that case has been heard on final appeal – see CIR v Poon Cho-ming John[2019] HKCFA 38 – and the CFA confirmed that the applicable principles are those set out in Fuchs, and that the Court of Appeal had correctly applied those principles on the particular facts of the Poon case.)

26. It is significant in the context of this application for leave to appeal that it is common ground between Mr Mariani and Mr Leung that the Board correctly identified the legal principles to be applied. As Mr Mariani put it, the Board and the Taxpayer and the CIR “are on all fours as regards the applicable law”. Of course, each case ultimately involves applying the statutory language to the facts. There may be different phrases which have been used by judges in different cases to describe where the source of payment satisfies the statutory language that it is “from” employment, but ultimately it is the statutory words which apply. It is necessary to look at the substance, not the form nor the formulae or labels which might have been adopted by the parties. Entitlement to a payment under a contract of employment would indicate the payment is from employment, but even the absence of such an entitlement then requires looking further at the purpose of the payment.

27. As it is convenient to do, the Board considered the relevant Sums in three sections of the Decision, dealing with (1) Sum A and Sum B1 together, (2) Sum B2 and Sum C together, and then (3) Sum D.

28. As to Sum A and Sum B1, the Board noted that both sums were derived from the 2011 Shares, which it found to have been unequivocally guaranteed in the Employment Contract in passages which it quoted. One part of the provisions quoted was that:

“The Guaranteed Bonus in the form of restricted shares detailed above will be released on the condition that you have not resigned or been dismissed as a result of your gross misconduct on the date the restricted shares are due to be released.”

29. It is, of course, an undisputed fact that the Taxpayer had not resigned and was not dismissed as a result of his gross misconduct.

30. The Board took into account that the Taxpayer’s own testimony was that the guaranteed bonus was a significant part of his compensation package. The Board further noted that the continued vesting of the 2011 shares was not subject to any condition in the Termination Agreement. The Board found that Sum A and Sum B1 were contractual entitlements the Taxpayer had under the Employment Contract, and accordingly rejected the submission that he had no accrued right to the 2011 Shares, and rejected the submission that the discretion to vest the 2011 Shares was consideration given for a separate bargain, namely the Termination Agreement. Reference was also made by the Board to certain rules in the applicable Plan, as part of the rejection of the submission that the primary cause for the Taxpayer to be paid Sum A and Sum B1 was a “fresh bargain”, without which the 2011 Shares which remained unvested at the date of termination of the Taxpayer’s employment would in effect simply have lapsed.

31. Hence, the Board found Sum A and Sum B1 to be “income from employment” within the meaning of section 8 of the IRO, so chargeable to salaries tax.

32. The Board noted that Sum B2 and Sum C were derived from the 2012 Shares, as part of a discretionary bonus which provided no guarantee of them or their value. Having referred to clause 1.1(b) of the Termination Agreement, the Board found Sum B2 and Sum C to represent the value of shares the Company released to the Taxpayer pursuant to the Termination Agreement, instead of being contractual entitlements under the Employment Contract.

33. Nevertheless, the Board noted that was not determinative as to whether their value was “income from employment”, and went on to consider the purpose for which the employer made the payment to the employee. To ascertain that purpose, the Board considered the background against which the Termination Agreement was entered into, engaging in what Mr Leung described as a “multi-factorial assessment”. The Board looked in particular at the background circumstances, the correspondence between solicitors for the Taxpayer and the Company, what it regarded as the peripheral importance of the data access request, and the general confidentiality provision and withdrawal of threat of litigation in the Termination Agreement as not constituting a fresh bargain. The Board held as a fact overall that the disagreement between the Taxpayer and the Company had not gone to the point that litigation was imminent or where the Company was eager to settle to avoid litigation.

34. On that basis, the Board distinguished the facts from those in the Poon case, which involved the making of a payment as “consideration to make the Taxpayer go away quietly”. The Board held that the continuing release of the 2012 Shares to the Taxpayer was “in return for acting or being an employee” or as a “reward for past services” and was not “for something else”. Hence, Sum B2 and Sum C were “income from employment” chargeable to salaries tax.

35. As to Sum D, the Board considered but rejected on the evidence the Taxpayer’s contention that he was acting as an “expert witness” or an “independent consultant”. Instead, the Board held that both the Taxpayer and the Company had an “understanding” that he was assisting in the capacity of a former employee. Some reliance was placed on the basis of calculation of the daily rate by reference to a specific proportion (1/260) of the Taxpayer’s final fixed pay. Pointing out, on the basis of the authority of Hochstrasser (Inspector of Taxes) v Mayes [1960] AC 376 (HL) at 388, that a payment would be taxable insofar as it is “made in reference to the services the employee renders by virtue of his office, and it must be something in the nature of a reward for services past, present or future”, the Board found Sum D to be “income from employment” chargeable to salaries tax.

The Proposed Appeal

36. In the Statement in Support of Application for leave to appeal, Mr Mariani identified three grounds of proposed appeal. Those three grounds essentially arose one each from the three sections of the Decision, and are as follows:

(a) Ground 1: Whether the Board erred in law in finding that Sums A, B1, B2, C and D were sums sourced from the employment of the Appellant within the meaning of sections 8(1) and 9(1)(a) of the IRO – that is, a reward for past, present, or future services in employment as opposed to consideration for something else – where the evidence before it was univocal that each sum was actually paid because restricted shares were released by the Company pursuant to the Termination Agreement, and not the Employment Contract.
(b) Ground 2: Specifically as regards Sums B2 and C, whether the Board erred in law in concluding that they were income from employment within the meaning of section 8(1) and so chargeable to salaries tax, notwithstanding its finding of fact that such Sums were not sourced in the Employment Contract.
(c) Ground 3: Specifically as regards Sum D, whether the Board erred in law in finding that sum was derived from the Appellant’s prior employment with the Company or was otherwise a reward for services rendered in employment, notwithstanding that the Appellant was, at the time he rendered the services for which Sum D was consideration, not employed by the Company and there was nothing in his Employment Contract requiring him to render such services.

37. Each of those grounds was explained in two or three further sub-paragraphs:

(a) As to Ground 1, the main point made was that the Board erred in failing to distinguish between the grant of a restricted share and its vesting, where the Taxpayer received nothing of value upon the grant, and received value only upon the vesting of such shares, which vesting was (in the case of a departing employee) contractually subject to the agreement of the Company. Hence, the continued vesting was confirmed by the Termination Agreement, which was by way of fresh consideration extracted from the Taxpayer that required him to enter into certain covenants and undertakings that did not exist in the Employment Contract. The new bargain was the true source of the vesting.
(b) As to Ground 2, the main point made was as regards the manifest inconsistency between the finding of fact that Sums B2 and C represented the value of shares released pursuant to the Termination Agreement and the conclusion nevertheless that those sums were from the Appellant’s employment for the purposes of the charge to salaries tax. It was said that there is a logical fallacy in confusing correlation with causation.
(c) As to Ground 3, the main point made was that where there was no employment at the time of the provision of services for which Sum D was paid, and no prior agreement in the Employment Contract that the Taxpayer should render those services, the only contractual arrangement governing the provision of services was in the Termination Agreement.

38. It was common ground between Mr Mariani and Mr Leung that I might make different findings on each of the proposed grounds of appeal. In other words, they fall for separate consideration and do not necessarily stand or fall together.

Ground 1 – Sums A and B1

39. As a preliminary point, I agree with Mr Leung that Ground 1 could only have application to Sums A and B1, and not to Sums B2 or C. This is because, contrary to the suggested error in the finding identified at the end of Ground 1, the Board did find that Sums B2 and C were released by the Company pursuant to the Termination Agreement, and not the Employment Contract. In the end, I think Mr Mariani agreed that Ground 1 would be limited to Sums A and B1, so that if I grant leave to appeal on this ground he would be content to delete the references to Sums B2 and C.

40. Mr Leung then argued that Ground 1 fails to identify and state a proper question of law, being nothing more than a mere conversion of the Board’s conclusions into a question, and no question of law arises from the reasons set out in the Appellant’s Statement in any event. In essence, he said, the ground was in reality a disguised challenge to findings of fact. In any event, he said, the construction of written instruments is a question of mixed law and fact, where “construction” includes two things being first the meaning of words and secondly their legal effect, or the effect which is to be given to them. Construction becomes a question of law as soon as the true meaning of the words in which an instrument has been expressed and the surrounding circumstances, if any, have been ascertained as facts (the meaning of words or technical or commercial terms, and discovery of surrounding circumstances when relevant being questions of fact). Mr Leung reminded me that proposed appeals from findings of mixed fact and law are to be treated in the same way as proposed appeals from findings of fact.

41. In response, Mr Mariani argued that the question of the contractual source of payment to determine whether it falls within the section 8(1) charging provision is “a paradigmatic question of law”, where the appellate court would be asked to decide whether the Board misdirected itself in law in identifying the sources of Sums A and B1 in the Employment Contract as opposed to the Termination Agreement.

42. Mr Mariani argued that the Board failed to recognise the “independent contractual vitality” of the Termination Agreement, being the separate bargain struck between the Company and the Taxpayer well after the employment had ceased, and which stipulated that the Taxpayer accepted certain undertakings and covenants to which he was not already bound by the Employment Contract. Those issues, he says, are questions of law, because they go to the heart of the proper construction of section 8(1) and the proper interpretation of the Employment Contract and the Termination Agreement. The position is binary; either a sum is “from” employment, or it is not. So, the way to frame an appeal on that specific point of law is asking whether the Board erred in law in mischaracterising the source of the sum received by the employee. Reference back to the Board’s reasoning and conclusions within the formulated ground of appeal does not necessarily amount merely to reframing the decision as a question.

43. As regards the form of the question posed by Ground 1, Mr Mariani also pointed to its similarity with the question formulated for the appeal in the Poon case, and suggested it is unclear why Ground 1 drafted following a similar rubric and on comparable terms should not be thought to be properly stated.

44. Though I think there is at least room for some doubt about it, I am prepared to accept Ground 1 as framing a question of law.

45. As I have indicated above, Mr Mariani accepts that the Board came to its conclusions of law by adopting the correct methodology, by seeking to identify what each payment was for – that is, what was its purpose – in the causal sense, but he submits that the Board arrived at the wrong conclusion by ascribing the source of Sums A and B1 to the Employment Contract, and not to the Termination Agreement.

46. However, I do not think that Ground 1 is reasonably arguable. Whilst the challenge is based upon the suggestion that the evidence before the Board was univocal that the sum was paid because restricted shares were released pursuant to the Termination Agreement and not the Employment Contract, I disagree.

47. Whilst it is correct that there is a difference between the grant of the restricted shares and the vesting of those shares, the Board was alive to the difference (and indeed recited Mr Mariani’s argument based upon it). I do not think that the Board was distracted by the label or formula “guaranteed bonus” in the Employment Contract, as Mr Mariani suggested. Rather, the Board simply looked at the terms of the Employment Contract. It held, in my view correctly, that the 2011 Shares were unequivocally guaranteed by the Employment Contract, so giving rise to a contractual entitlement to the vesting of those shares.

48. The Board considered not just the provisions of the Employment Contract, but the Taxpayer’s own testimony (which I have mentioned above), and rightly pointed out the absence of any condition in the Termination Agreement to the continued vesting of the 2011 Shares. I say “rightly pointed out” because clause 1.1(d) said expressly, and so as to avoid any doubt, that the 2011 Shares “will continue to vest on the release date(s) set out in the letter awarding them to your client”. (Though it does not particularly matter, that point as to contractual entitlement had been precisely the Taxpayer’s own previous argument.)

49. In those circumstances, any “independent vitality” of the Termination Agreement does not matter. I do not think the general waiver of claims or promises of confidentiality or anything else in the Termination Agreement reasonably arguably change the analysis.

Ground 2 – Sums B2 and C

50. The main focus of Mr Mariani’s argument on Ground 2, and the reason why the ground is said to arise separately from Ground 1, was from the suggested internal contradiction in the Decision. The argument was that, once the Board found that Sums B2 and C were not contractual entitlements under the Employment Contract, but instead represented the value of the shares released to the Taxpayer pursuant to the Termination Agreement, it was not open to the Board inconsistently to hold that the value should nevertheless be chargeable to salaries tax as income from employment.

51. Mr Mariani argued that that conclusion was erroneous, in failing to distinguish between the grant of the share subject to a vesting schedule on the one hand, and the vesting of the share on the other. Again, he drew the distinction between when economic value was received by the Taxpayer, that being not on the grant but only on the vesting. Whilst he accepted that the quantum of the shares granted to the Taxpayer was indeed a reflection of his performance in employment, the vesting of the shares arose from the Termination Agreement, as the Board itself concluded. Therefore, to mistake correlation for causation is a logical fallacy and a plain error of law. As Mr Mariani put it, because the Taxpayer was not entitled to the vesting of those shares at the date of the cessation of his employment, he received Sums B2 and C from the Termination Agreement, and not otherwise.

52. Mr Mariani submitted that the juristic source of the transfer of value was the Termination Agreement, which was made months after the employment relationship had ceased, and that the Taxpayer only got anything vested because he agreed to the terms of the Termination Agreement. Putting it slightly differently, he suggested that the causal nexus was interrupted by the “fresh bargain” made in the Termination Agreement. That the amount of Sums B2 and C might have been in the same amounts as would have vested had the Taxpayer continued to be employed is a matter of correlation or computation, not one of source.

53. However, I agree with Mr Leung that the focus on the suggested inconsistency is misplaced. As the Board itself said, the mere fact that the release of the 2012 Shares was made pursuant to the Termination Agreement is not determinative as to whether their value paid to the Taxpayer was income from employment. It remained necessary to consider the purpose for which the Company made that payment, there being many cases (and Fuchs was one of them) where sums paid pursuant to a termination or similar agreement have nevertheless been held to be “from” employment.

54. Here, the Board examined the facts to ascertain the purpose of the payment, of course including the terms of the Termination Agreement itself and the factual matrix against which it was made. The Board made a finding of fact that the 2012 Shares were not released for the purpose of settling potential litigation, because it did not accept that there was in fact sufficient prospect of litigation. So there was also the finding that the purpose of continuing release of the 2012 Shares was “in return for acting or being an employee” or as a “reward for past services”. That purpose brought the payment within the meaning of section 8(1)(a).

55. I might add that the supposed conditionality for release of the 2012 Shares, against compliance with the terms of the Termination Agreement, was something in any event foreshadowed by the terms of the relevant Plan. Those terms provided that where the rule of good leaver is applied and the participant had entered into a termination agreement in connection with the cessation of employment, the awards would not vest until the participant had complied with, or was released from his obligations under, that termination agreement. Though the Plan was not part of the Employment Contract, the Taxpayer only became a participant in it as a consequence of his employment, and that participation therefore came directly from his employment. The Plan specifically envisaged that if, as became the fact, the Taxpayer left as a good leaver his awards would vest so long as, albeit not until, he complied with any termination agreement entered into. The Plan also specified that the award would vest on the vesting date specified, provided the participant remained continuously employed within the Group or fell within the scope of the ‘good leaver’ provisions set out in the Plans. The Taxpayer fell within the latter description, so I do not think it is reasonably arguable that the substance of the Sums B2 and C were other than “from” employment, as the reward for past services.

56. Mr Mariani also criticised the Board for adopting a reading of the Poon case which was overly reliant on the technically irrelevant factual distinctions between the two disputes, glossing over compelling similarities of principle. I agree with Mr Leung that that criticism is misplaced. First, it is actually common ground that the correct legal principles were identified by the Board. However, it fell to the Board to apply them to the facts of this case. The Board identified where it thought the facts of this case differed from those in the Poon case. In essence, the Board found that the payments of Sums B2 and C, and in contrast to the Poon case, were not payments made so that the Taxpayer would “go quietly”.

57. Stepping back, and looking at the big picture, the question for the Board might be put as follows: What was the continued release of the 2012 Shares really given for as a matter of substance? Was it given for past performance in employment, or was given for something else? On the basis that the continuing release of the 2012 Shares was not “for something else”, notwithstanding that they were triggered by the Termination Agreement, the Board found them to be the reward for past services.

58. I do not think Ground 2 is reasonably arguable.

Ground 3 – Sum D

59. Mr Mariani described the Board’s reasoning as “with respect, incoherent”. Even if there was evidence (which Mr Mariani does not accept) to support a finding of the “understanding” between the Taxpayer and HSBC that the former would help the latter in the Litigation, there is no provision in the IRO to charge to salaries tax any sums paid by a former employer to a former employee with respect to services not contemplated in the former employee’s contract of employment and rendered after the relevant employment had ceased.

60. In those circumstances, Mr Mariani submits, such sums simply could not be “from” employment, and the Board’s reliance on the Hochstrasser case was misplaced. Therefore, the Board’s conclusion was a non sequitur legally speaking, and that amounted to an error giving rise to a question of law.

61. In response, Mr Leung points out that Mr Mariani is re-running his argument before the Board, though that does not seem to me to matter if the argument gives rise to a ground of appeal with reasonably arguable prospects. But Mr Leung also submits that the fact that service was rendered after the formal end of the Taxpayer’s employment does not preclude the Board from finding that payment received was “from” his employment, as section 8(1) is not limited or confined to income earned in the course of employment. Nor is there anything in the case law, such as Fuchs, which says that a payment can only be taxable if it is made in relation to a task stipulated under the employment contract. That, says Mr Leung, is not the statutory test.

62. But, perhaps Mr Leung’s primary point is that it was the Taxpayer’s case before the Board that he was acting as an “expert witness” or “independent consultant” in providing assistance in the Litigation, but the Board rejected that contention after examining all the facts. Once the Board had come to that decision, it followed that the Taxpayer had failed to discharge his burden of proof in relation to Sum D.

63. I am not sure I agree with Mr Leung’s criticism that Ground 3 is another thinly disguised attack on the Board’s findings of fact. Albeit that the case may involve consideration of the relevant facts, the ultimate question remains under the statutory test as to whether or not Sum D was income “from” employment.

64. Nevertheless, it seems to me that the facts on which the Board placed reliance at least reasonably arguably identify that Sum D was not income “from” employment. It is correct that the Taxpayer’s own letter to the Company dated 28 January 2013 acknowledged that after termination he was “willing to provide reasonable assistance” in relation to legal proceedings, but that was in circumstances where he had no obligation to do so under the Employment Contract, and it is unlikely that someone of his seniority would do so without monetary compensation. It is also correct that the basis of the compensation was ultimately calculated as a proportion of his final base salary, but I do not think mere computation or calculation answers the question as to whether the payment was “from” employment. Most importantly, another fact to which the Board paid attention was that clause 2.1(a)-(b) of the Termination Agreement, under the heading “obligations after termination of employment”, provided that:

“… reasonable assistance in relation to any claim or threaten claim, investigation, administrative or regulatory proceedings as the Company or the Group may reasonably require in relation to any matter with which [the Taxpayer] was dealing during his employment and/or any matter which arises after the termination of [the Taxpayer’s] employment with the Company but in relation to which [the Taxpayer] has relevant knowledge.”

65. I think that clause identifies, at least reasonably arguably, that the source of the payment of Sum D was the Termination Agreement. There seems to me to be real force in Mr Mariani’s submission, which acknowledged that of course the Taxpayer was useful because he had previously been employed, and the Company wished to maintain the benefit of knowledge obtained during employment, but the money was actually not paid for providing services which can be said to have come themselves “from” the employment. The Taxpayer had no compulsion to assist in the way he agreed to, and he agreed to as part of – and only as part of – the Termination Agreement.

66. I also agree with Mr Mariani that, notwithstanding where the burden lay before the Board, the question as to the source of income is not a matter which ought to be decided by default. Indeed, if one focuses merely on whether the Taxpayer can be regarded as an “expert witness” or “independent consultant” in his assistance in the Litigation, it is easy to lose sight of the real question. The only burden which the Taxpayer faced was to identify that Sum D was not “from” his prior employment so that it was “from something else”. I do not think it was necessary to have identified in precise terms the “something else” so has to have satisfied the burden that it was not “from” employment.

67. I also have in mind that had the services being provided for more hours, or over a longer period, on the facts they would almost certainly have been taxable as income in Singapore, or potentially as income chargeable to tax under section 14 of the IRO in Hong Kong. Those points also seem to me to make it at least reasonably arguable that the Sum D is not properly chargeable to tax under section 8(1)(a).

68. In the circumstances, therefore, I would grant leave on Ground 3.

Result

69. I refuse leave to appeal on Grounds 1 and 2. I grant leave to appeal on Ground 3 only.

70. However, I am conscious that the relevant income and the tax chargeable on it is almost de minimis against the wider scheme of the battleground before the Board, and in the intended proposed appeal. In the circumstances, I direct that the appeal on Ground 3, if it is necessary that it is pursued to an actual argument, shall be reserved to myself to be dealt with on paper submissions only. I shall allow (a) 10 pages of written submissions for the Taxpayer to pursue the appeal, (b) 10 pages of written submissions for the CIR to oppose the appeal, and (c) 5 pages of written submissions for the Taxpayer to reply. Those submissions will be provided by 10 January 2020, 17 January 2020, and 24 January 2020 respectively.

Costs

71. As to the costs of the leave application, I heard submissions during the hearing. Essentially, it was agreed that the usual order upon the grant of any leave to appeal would be that the costs of the leave application should be in the appeal, though it was recognised that there could be a different costs order if leave to appeal is granted on only one or two but not all three grounds pursued.

72. As I have refused leave to appeal on the more financially substantial grounds, and only granted leave to appeal on one of relative inconsequence financially (even if not as a matter of principle), I do not think it would be right that the substantial part of the costs from the leave application should follow the result of any further argument on Ground 3. I also take account of the fact that both sides of the argument on whether leaves should be granted on Ground 3 were dealt with in rather shorter order than the arguments on the other two more complex grounds.

73. In those circumstances, it seems to me in the exercise of my broad discretion on costs that the CIR is entitled to 75% of the CIR’s costs of the leave application in any event, to be taxed if not agreed. The other costs will be costs in the appeal.

(Russell Coleman)
Judge of the Court of First Instance
High Court

Mr Stefano Mariani, instructed by Deacons, for the appellant

Mr Wilson Leung, instructed by Department of Justice, for the respondent

HEATH BRIAN ZARIN v. THE COMMISSIONER OF INLAND REVENUE

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